Taking Advantage of Balance Transfers

One of the benefits credit cards offer is convenience. They make it easier to pay for everyday expenses and larger purchases that would otherwise require carrying a lot of cash. But, if you’ve settled into making only the minimum required payment each month on your credit card, you may find you’re paying an excessive amount of interest and your outstanding balance seems to be decreasing at a snail’s pace.

Transferring this balance to a lower-interest-rate credit card, as part of an overall debt reduction plan, could save you some money and contribute to getting you out of debt sooner. Balance-transfer offers are fairly common, so deciding which offer might work in your favor can be tricky. If you’re not careful, moving a balance from one card to another could cost you more than you expected.

Consider these three things before deciding on whether or not a balance transfer is right for you.

Clarify Any Savings Benefits Before You Sign Up

Some credit card issuers charge a balance transfer fee for moving debt to the new card, so it’s important to figure out if this fee negates any potential cost savings of making a transfer. While feeless balance transfer offers exist, many offers range between 3% and 5% of the transferred balance.

Weigh how much you expect to save in interest charges against this fee. For example, a 5% transfer fee on $3,000 equals $150. If the amount you’ll save in interest by doing such a transfer is less than $150, then it doesn’t make fiscal sense to do it.

Pay Attention to the Balance Transfer Details & Promotional Period

The promotional period is the length of time the credit card issuer provides new cardmembers with a reduced interest rate on transferred balances. This period often ranges between six and 18 months. 

If you’re planning on paying off your balance before the end of the promotional period, look for a transfer balance offer that matches your debt-reduction plan. For example, if you’re transferring $3,000 to a card with a 0% APR and a six-month promotional period, are you willing to adjust your budget so you can pay at least $500 each month toward the balance for the next six months?

You aren’t required to pay the balance in full before the end of your promotional period, but doing so has the potential to save you a significant amount of money in interest charges. So, to get the most out of a balance transfer, use the promotional period to pay down as much of your balance as possible.

Some balance transfers come with a penalty APR, which is a higher annual percentage rate that may be applied to current and even future balances if you make a late payment. What’s more, missing a payment or being late with your payment could also cancel the lower APR of the promotional period. It’s also important to note that the lower interest rate you’re receiving on the balance you transferred to a new credit card may not apply to any new purchases made with that card. Those purchases may be subject to the credit card’s standard APR.

Understand What Happens After the Promotional Period Ends

Once the promotional period is over, the credit card’s regular interest rate should go into effect on the unpaid amount of the balance you transferred, plus any applicable fees as specified in the terms and conditions of the balance transfer. So, before you say “yes” to a particular offer, know what will happen if your debt-reduction plan gets sidetracked and you’re unable to pay off the transferred balance in full.

In deciding whether or not to do a balance transfer from an existing credit card to a new one, look beyond the special offers and compare the benefits of a new card against your current credit card. Even if you won’t be able to pay off the transferred balance in full before the promotional period end, the new card’s regular APR may be lower than your current credit card’s. Or the new card may offer the ability to earn cash back rewards, or perhaps it doesn’t charge an annual fee like your current credit card. Again, all of this information should be spelled out in the terms and conditions of the new card’s cardholder agreement. 

If you’ve decided a balance transfer is right for you, be prepared to spend some time shopping around. Finding the right fit could save you money and contribute toward the success of your debt-reduction plan.